Debt = Money, Money = Debt

Where does money come from? You would think that question should be so simple that any 10-year-old child could answer it, but that is not the case. You see, the truth is that the vast majority of American adults cannot even answer that question. Yet we all use money every day. Without money our lives would fall apart fairly quickly. But most of us never stop to think about how it comes into existence. The truth is that bankers are the source of all money in the United States. Either the Federal Reserve bankers create it, or individual bankers create it through the mechanism of fractional reserve banking. In both cases, it is bankers that are creating the money. In our financial system, the U.S. government cannot print money and no individual citizens are allowed to create money. Rather, it is the bankers who have a complete and total monopoly on the creation of money in the United States.

Most of the time, any money that is created comes into existence as debt. Either the U.S. government goes into more debt when it gets more dollars from the Federal Reserve or individual Americans go into more debt when they take out loans from individual banks.

First, let’s examine what happens when the U.S. government gets more money from the Federal Reserve.

Under our current system (which is fundamentally flawed), the U.S. government cannot just fire up the printing presses and print a bunch of dollars if it decides that more money needs to be produced.

Rather, if the U.S. government needs more money it asks the Federal Reserve for it.

So who is the Federal Reserve[2]? Well, they are actually not part of the U.S. government. In fact, the Federal Reserve is about as “federal” as Federal Express is.

The Federal Reserve is actually a privately-owned central bank that has been given authority by the U.S. Congress to issues our currency, set our interest rates and essentially run our economy[3].

All U.S. government debt is created through the Federal Reserve system.

When the government wants more money, the U.S. government swaps U.S. Treasury bonds for “Federal Reserve notes”, thus creating more government debt. Usually the money isn’t even printed up – most of the time it is just electronically credited to the government. The Federal Reserve creates these “Federal Reserve notes” out of thin air. These Federal Reserve notes are backed by nothing and have no intrinsic value of their own.

The Federal Reserve then sells these U.S. Treasury bonds to investors, other nations (such as China) or sometimes they “sell” them back to themselves. In fact, the Federal Reserve has been gobbling up a whole lot of U.S. Treasuries lately. Some refer to this as “monetizing the debt”, but that is not quite an accurate statement.

When the Federal Reserve creates money this way, it does not also create the money to pay the interest on the debt that has been created. Eventually this puts pressure on the U.S. government to borrow even more money to keep the game going. So what this creates is a spiral where the U.S. government must keep borrowing increasingly larger amounts of money, where the money supply is endlessly expanding and where the value of the U.S. dollar is destined to continue going down forever.

Do you think it is some big mystery why the value of the U.S. dollar has declined over 95 percent since the Federal Reserve was created in 1913? Just look at what our national debt has been doing over the last 40 years. It just continues to go up and up and up….

As long as the Federal Reserve system exists, the national debt will keep going up, the money supply will keep going up and the U.S. dollar will continue to decline in value.

This is not because of some big mistake. This is what the Federal Reserve system was designed to do. It was designed to trap the U.S. federal government (and by extension all of us) in perpetual debt[7].

If the U.S. government really wanted to get out of debt it would take back control of our currency from the bankers and would start issuing debt-free money. But don’t expect that to happen any time soon.

In fact, the Federal Reserve is just getting more powerful and becoming more out of control[8]. According to data released on Wednesday, over $9 trillion in overnight loans were made by the Federal Reserve to major banks and large financial institutions during the financial crisis in 2008 and 2009.

Now, the truth is that this number is inflated because each time one of these loans was “rolled over” it was counted as a new loan[9] by the Fed. So don’t get too excited about the $9 trillion figure. But still, the amount of money that the Federal Reserve just whipped up out of thin air and lent out to its friends at extremely low interest rates is absolutely mind blowing.

In 2010, the Federal Reserve has initiated a massive new round of “quantitative easing[10]“, and it is yet another example of how out of control the Federal Reserve is becoming. So exactly what is quantitative easing? Well, essentially what happens is the Federal Reserve conjures up gigantic amounts of money out of thin air and uses it to buy up things like U.S. Treasury bonds and mortgage-backed securities. The Fed hopes that by injecting hundreds of billions into the system it will “stimulate” the economy.

Prior to 2008, the Federal Reserve had never been so bold as to print up hundreds of billions of dollars whenever it wants. But now it seems as though the Federal Reserve is just going to zap hundreds of billions of dollars into existence whenever their friends are in trouble or whenever they feel the economy needs a little “stimulus”.

So can you or I “zap” money into existence? No, if we print money we go to jail.

Can the U.S. government “zap” money into existence? No, only the Federal Reserve is allowed to do that.

But most Americans will never understand how this system works.

The second primary way that our money comes into existence is through fractional reserve banking.

“If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+…=$1,000).”

This is actually an oversimplification, but let’s roll with it. Many Americans would be shocked to learn that if we all went down to the bank today and wanted to take our money out, the bank would only be able to satisfy a small fraction of our requests.

The bank does not keep all of your money in the bank. It lends most of it out.

In fact, any bank can loan out as much money as it wants as long as it keeps enough in reserve to satisfy legal requirements.

Each time a loan is made by a bank, more money is created and more debt is created.

Isn’t this kind of insane?

Well, yes, but at least banks have to maintain a certain amount of discipline by keeping some money in reserve.

There are a few members of Congress such as Rep. Ron Paul that have tried to hold the Federal Reserve accountable. The following is an excerpt[13] from remarks that Ron Paul made to Bernanke during a congressional hearing a while back….

“The Federal Reserve in collaboration with the giant banks has created the greatest financial crisis the world has ever seen. The foolish notion that unlimited amounts of money and credit created out of thin air can provide sustainable economic growth has delivered this crisis to us. Instead of economic growth and stable prices, (The Fed) has given us a system of government and finance that now threatens the world financial and political institutions. Pursuing the same policy of excessive spending, debt expansion and monetary inflation can only compound the problems that prevent the required corrections. Doubling the money supply didn’t work, quadrupling it won’t work either.”

Unfortunately, Ron Paul is vastly outnumbered by members of Congress who seem to believe that the Federal Reserve is doing a great job. In fact, a bill that would have provided for a one-time audit of the Federal Reserve got shot down. Apparently members of Congress did not think it was a good idea for the American people to be able to get a peek inside the institution that issues our money and runs our economy.

It is time for the American people to wake up. The borrower always ends up the servant of the lender. In America today, virtually all of our money comes into existence as debt, nearly all of our major purchases are made with debt, the popping of debt bubbles has caused almost every major financial crisis we have had, our state and local governments are drowning in a sea of debt, and our federal government has piled up the biggest mountain of debt in the history of the world.

Any economic system that is based on debt is destined to fail – including ours. Isn’t it about time to start asking ourselves how we got into this gigantic mess in the first place?

Unfortunately, Americans have been so dumbed-down by our pathetic education system and are so busy gorging themselves on endless amounts of entertainment that they literally have no idea how our system works.

Most people will never wake up until a complete and total economic collapse happens. By then, it will be far too late.